Sigrún Davíðsdóttir's Icelog

Contacts between Iceland and Russia have for almost two decades been a source of speculations, some more fancifully than others. The speculations have now again surfaced in the international media following the focus on US president Donald Trump and his Russian ties: part of that story involves his connections with Bayrock where two Icelandic companies, FL Group and Novator, are mentioned. Contrary to the rumours at the time, Icelandic expansion abroad up to the banking collapse in 2008 can be explained by less sensational sources than Russian money – but there are some Russian ties to Iceland.

“We have never seen businessmen who operate like the Icelandic ones, throwing money around as if funding was never a problem,” an experienced Danish business journalist said to me in 2004. From around 2002 to the Icelandic banking collapse in October 2008, the Icelandic banks and their largest shareholders attracted attention abroad for audacious deals.

The rumours of Russian links to the Icelandic boom quickly surfaced as journalists and others sought to explain how a tiny country of around 320.000 people could finance large business deals by Icelandic businesses abroad. The owners of one of Iceland’s largest banks, Landsbanki, father and son Björgólfur Guðmundsson and Björgólfur Thor Björgólfsson, had indeed become rich in Saint Petersburg in the 1990s.

The unequivocal answer on how the foreign expansion of Icelandic banks and businesses was funded came in the Special Investigative Commission Report, SICR, in 2010: the funding came from Icelandic and international banks; the Icelandic banks found easy funding on international markets, the protagonist were at the same time the banks’ largest shareholders and their largest borrowers.

The rumours of Russian connections have surfaced again due to the Bayrock saga involving US president Donald Trump and his relations to Russia and Russian mobsters. Time to look at the Icelandic chapter in the Bayrock saga and Russian Icelandic links.

The Bayrock saga

By now, there is hardly a media company in the world that has not paid some attention to Donald Trump and Bayrock, with a mention of the Icelandic FL Group and the Russian money in Icelandic banks and businesses. The short version of that saga is the following:

Tevfik Arif, born in Kazakhstan during the Soviet era, was a state-employed economist who turned to hotel development in Turkey in the 1990s before moving into New York property development where he founded Bayrock in 2001. As with many real estate companies Bayrock’s structure was highly complex with myriad companies and shell companies, on- and offshore.

Arif hired a Russian to run Bayrock. Felix Sater or Satter was born in Russia in but moved to New York as youngster with his family. In 1991 Sater was sentenced to prison for a bar brawl cutting up the face of his adversary with a broken glass. Having admitted to security fraud in cohort with some New York Mafia families in 1998 he was eventually found guilty but apparently got a lenient sentence in return for becoming an informant for the law enforcement.

In 2003, Arif and Sater were introduced to a flamboyant property developer by the name of Donald Trump, already a hot name in New York. One of their joint projects was the Trump Soho. The Trump connection did attract media attention. Apparently following a New York Times profile of Sater in December 2007, unearthing his criminal records, Arif dismissed Sater in 2008.

Bayrock and FL Group

By then, another scheme was brewing and that is where the Icelandic FL Group enters the Bayrock and Trump story. This part of the story has surfaced in court cases, still ongoing, where two ex-Bayrock employees, Jody Kriss and Michael Ejekam, are suing Bayrock for cheating them of profit inter alia from the Trump SoHo deal.

Their story details complicated hidden agreements whereby Arif and Sater, according to Kriss and Ejekam, essentially conspired to skim off profit from Bayrock, cheating everyone who entered an agreement with them. According to the story told in the court documents (see inter alia here) Bayrock entered an agreement with FL Group in May 2007: for providing a loan of $50m FL Group would get 62% of the total profits from four Bayrock entities, expected to generate a profit of around $227.5m.

The loan arrangement with FL Group did not make a great financial sense for Bayrock, again according to Kriss and Ejekam, but it was part of Arif and Sater’s scheme to cheat investors as well the US tax authorities. When Kriss complained to Sater that the $50m loan from FL Group was not distributed as agreed, Sater “made him (Kriss) an offer he couldn’t refuse: either take $500,000, keep quiet and leave all the rest of his money behind, or make trouble and be killed.” – Given Sater’s criminal record and threats he had made to another Bayrock partner Kriss left Bayrock.

The short and intense FL saga and its record losses

FL Group was one of the companies that formed the Icelandic boom. Out of many financial follies in pre-crash Iceland the FL Group saga was one of the most headline-creating. In 2002 Jón Ásgeir Jóhannesson, of Baugur fame, bought 20% in the listed air carrier Flugleiðir. In 2004 he teamed up with Hannes Smárason who with a degree from the MIT and four years at McKinsey in Boston had a stellar CV.

Smárason was first on the board until he became a CEO in October 2005. The duo oversaw the take-over of Flugleiðir, sold off assets and turned the company into an investment company, FL Group; inter alia FL Group was for a short while the largest shareholder in EasyJet.

In spring 2007, a group of investors led by Jóhannesson became the largest shareholder in Iceland’s third largest bank, Glitnir. Their Glitnir holding was through FL Group, consequently the bank’s largest shareholder.

At the beginning of 2007, the FL Group debt with the Icelandic banks amounted to almost €600m but had risen to €1.1bn in October 2008. Interestingly, its debt to Glitnir rose by almost 800%. As mentioned above, Jóhannesson and his business partners, among them FL Group, became Glitnir’s largest shareholder in spring 2007, following the pattern that the banks’ largest shareholders were also their largest borrowers.

FL Group – folly or a classic “pump and dump”?

By the end of 2007, 26 months after Hannes Smárason became CEO, FL Group had set an Icelandic record in losses: ISK63bn, now €660m, ten times the previous record, from 2006, incidentally set by a media company controlled by Jóhannesson.

Facing these stunning losses Smárason left FL Group in December 2007. The story goes that at the shareholders’ meeting where his departure was announced he left the room waving, saying “See you in the next war, guys” (In Icelandic: “Sjáumst í næsta stríði, strákar).

There are endless stories of staggering cost and insane spending related to the FL Group boom and bust. Interestingly, a large part of the losses stemmed from consultancy cost for projects that never materialised. Smaller investors lost heavily and in hindsight the question arises if the FL saga was a folly or some version of a “pump and dump.” Smárason was charged with embezzlement in 2013, acquitted in Reykjavík District Court but the State Prosecutor’s appeal was thrown out of the Supreme Court due to the Prosecutor’s mistakes.

FL Group never recovered from the losses and was delisted in the spring of 2008 and its name changed to Stoðir. FL Group never went into bankruptcy but its debt was written off. A group of earlier FL Group managers (Smárason is not one of them) now owns over 50% of Stoðir.

FL Group and the Icelandic Bayrock

Part of FL Group’s eye-watering losses was the Bayrock adventure. FL Group set up a company in Iceland, FL Bayrock Holdco, financed by the Icelandic mother company. Already in 2008 the FL Group Bayrock was a loss-making enterprise, its three FL Bayrock US companies were written off with losses amounting to ISK17.6bn, now €157m. When the Icelandic FL Bayrock finally failed in January 2014 Stoðir (earlier FL Group) was more or less the only creditor, its claims amounting to ISK13bn; no assets were found.

According to the Kriss-Ejekam story, FL Group willingly and knowingly took part in a scam. When I approached a person close to FL Group, he maintained the investment had not been a scam but just one of many loss-making investments, not even a major investment, compared to what FL Group was doing at the time.

An FL Group investor told me that he had never even heard of the Bayrock investment until the Trump-related Bayrock stories surfaced. He expressed surprise that such a large investment could have been made without the knowledge of anyone except the CEO and managers. He added however that this was perhaps indicative of the problems in FL Group: managers making utterly insane and ill-informed decisions leading to the record losses.

Bayrock and Novator

Another Icelandic company, mentioned in the Kriss-Ejekam case is Novator, which was offered to participate in Bayrock. There is a whole galaxy of Novator companies, inter alia 19 in Luxembourg, encompassing assets and businesses of Björgólfur Thor Björgólfsson.

This, according to court documents (emphasis mine):

During the early FL negotiations, Bayrock was approached by Novator, an Icelandic competitor of FL’s, which promised to go into the same partnership with Bayrock as FL was contemplating, and at better terms. Arif and Satter told Kriss that this would not be possible, because the money behind these companies was mostly Russian and the Russians behind FL were in favor with Putin, but the Russians behind Novator were not, and so they had to deal with FL. Whether or not this was true and what further Russian involvement existed must await disclosure.

This is the clause that has yet again fuelled speculations of Russian dirty money in the Icelandic banks and Icelandic companies. As stated in the last sentence this is however all pure speculation.

The story from the Novator side is a different one. In an email answer to my query, the spokeswoman for Björgólfsson wrote that Bayrock approached Novator Properties, which considered the project far from attractive. Following some due diligence Novator concluded that the people involved were not appealing partners, which led Novator to decline the invitation to participate.

The origin of rumours of corrupt Russian connections to Iceland

Towards the end of 2002 the largest Icelandic banks and their main shareholders were already attracting foreign media attention. Euromoney (paywall) raised “Questions over Landsbanki’s new shareholder” in November 2002 focusing on the story of the father and son Björgólfur Guðmundsson and Björgólfur Thor Björgólfsson, who with their business partner Magnús Þorsteinsson struck gold in Saint Petersburg in the 1990s and were now set to buy over 40% of privatised Landsbanki.

The two businessmen, the Brit Bernard Lardner and his Icelandic partner Ingimar Ingimarsson, who in the mid 1990s had hired the three Icelanders to run their joint Saint Petersburg venture, were less lucky. In 2011 Ingimarsson published a book in Iceland, The Story that Had to be Told, (Sagan sem varð að segja), where he tells his side of the story: how father and son through tricks and bullying took over the Lardner and Ingimarsson venture, essentially the story told in Euromoney in 2002 (see earlier Icelog).

In June 2005, Guardian’s Ian Griffith wrote an article on the Icelandic businessmen Björgólfsson and Jón Ásgeir Jóhannesson, ever more visible in the London business community, asking where the Icelandic “Viking raiders” as they were commonly called got their money from, hinting at Russian mafia money. The quick rise to riches, wrote Griffith, exposed the Icelanders to “the persistent but unsubstantiated whispering that the country’s economic miracle has been funded by Russian mafia money rather than growth and liberalisation.”

As Griffith points out, Björgólfsson and his partners were operating in Saint Petersburg, “the city regarded as the Russian mafia capital. That investment was being made in the drinks sector, seen by the mafia as the industry of choice. 

Yet against all the odds, Bravo went from strength to strength. 

Other St Petersburg brewing executives were not so fortunate. One was shot dead in his kitchen from the ledge of a fifth-floor window. Another perished in a hail of bullets as he stepped from his Mercedes. And one St Petersburg brewery burned to the ground after a mishap with a welding torch. 

But the Bravo business, run by three self-confessed naives, suddenly found itself to be one of Russia’s leading brewers. In under three years it became the fastest-growing brewer in the country. It secured a 17% market share in the St Petersburg region and 7% in the Moscow area. It was selling 2.5m hectolitres of beer a year in 2001 and heading for 4m when Heineken of the Netherlands stepped in to buy it for $400m in 2002. Heineken said one of the reasons for the Bravo purchase was the absence of any corruption.”

Björgólfsson has always vehemently denied stories of his alleged links to the Russian dark forces and Ingimarsson’s story. Billions to Bust and Back, published in 2014, is Björgólfsson’s own story of his life. The book has not been published in Iceland.

The Icelandic miracle exposed: international banks and “favoured clients”

During the Icelandic boom years Griffith was not the only one to question how the tiny economy of tiny Iceland could fund the enormous expansion of Icelandic banks and businesses abroad. The Russian rumours were persistent, some of them originating in the murky London underworld, all to explain this apparently miraculous growth. Most of this coverage was however more fiction than facts (the echo of this is found in my financial thriller, Samhengi hlutanna, which takes place in London and Iceland after the collapse, published in Iceland in 2011; English synopsis.)

The Icelandic Special Investigative Commission Report, SICR, published in April 2010, convincingly answered the question where the money came from: “Access to international financial markets was, for the banks, the principal premise for their big growth,” facilitated by their high credit ratings and Iceland’s membership of the European Economic Area, EEA. As to the largest shareholders the SICR concluded: “The largest owners of all the big banks had abnormally easy access to credit at the banks they owned, apparently in their capacity as owners… in all of the banks, their principal owners were among the largest borrowers.”

The story told in the SICR is how the Icelandic banks essentially ran a double banking system: one for normal bank clients who got loans against sound collaterals and loan contracts with normal covenants – and then another system for what I have called the “favoured clients,” i.e. the largest shareholders and their business partners.

The loans to the “favoured clients” were on very favourable terms, mostly bullet loans extended as needed, often with little or no collateral and light covenants. The consequence was that systematically, these clients profitted but if things went wrong the banks shouldered the losses. – In recent years, some of these abnormally favourable loans have sent around twenty bankers to prison.

The real Russian connections in Iceland

Although the Icelandic expansion abroad can be explained with less exciting facts than Russian Mafia and money laundering, there are a few tangible Russian contacts to Iceland: Vladimir Putin and the Kremlin did show an interest in Iceland at a crucial time, just as in Cyprus in 2013; Alisher Usmanov had ties to Kaupthing; the Danish lawyer Jens Peter Galmond, famous for his Leonid Reiman connections, and his partner Claus Abildstrøm did have Icelandic clients and Mikhail Fridman gets a mention.

At 4pm Monday 6 October 2008 prime minister and leader of the Independence party (conservative) Geir Haarde addressed Icelanders via the media: the government was introducing emergency measures to deal with the banks in an orderly manner. Icelanders sat glued to their tv sets struggling to understand the meaning of it all.

Haarde’s last words, “God bless Iceland,” brought home the severity of the situation. Icelanders had never heard head of government bless the country and never heard of measures like the ones introduced. The speech and the emergency Act it introduced came to be seen as the collapse moment – the three banks were expected to fail and by Wednesday 8 October they had all failed indeed.

An elusive Russian loan offer

The next morning, 7 October 2008 as Icelanders woke up to a failing financial system, the then governor of the Icelandic Central Bank, CBI, Davíð Oddsson, an earlier leader of the Independence Party and prime minister, told the still shocked Icelanders that all would be well: around 7am Victor I. Tatarintsev the Russian ambassador in Iceland had called Oddsson to inform him that the Russian government was willing to lend €4bn to Iceland, bolstering the Icelandic foreign reserves.

According to the CBI press release the loan would be at 30-50bp above Libor and have a maturity of three to four years. Later that day another press release just stated that representatives of the two countries would meet in the coming days to negotiate on “financial issues” – no mention of a loan.

According to Icelog sources, the morning news was hardly out when the CBI heard from news agencies that Russian minister of finance Alexei Kudrin had denied the story of a Russian loan to Iceland; indeed the loan never materialised though some CBI officials did fly out to Moscow a week later.

There have of course been wild speculations as to if the offer was real, why Kremlin was ready to offer the loan and then why Kremlin did, in the end, not stand by that offer.

Judging from Icelog sources it seems no misunderstanding that Tatarintsev mentioned a loan to Oddsson. As to why Kremlin – because that is where the offer did come from – wanted to lend or at least to tease with the offer is less clear though there is no lack of undocumented stories.

One story is that some Russian oligarchs did have money invested in Iceland. Fearing their funds would be inaccessible they pulled some strings but when they realised their funds were not in danger they lost interest in helping Iceland and so did Kremlin. Another explanation is that Kremlin just wanted to tease the West a bit, make as if it was stretching its sphere of interest further west. Yet another story is that a European minister of finance called his Russian counterpart telling him to stay away from Iceland; the European Union, EU would take care of the country.

Iceland found in the end a more conventional source of emergency funding: by 19 November 2008 it had secured $2.1bn loan from the International Monetary Fund, IMF.

Russia, Iceland and Cyprus

In 2013, Russia played the same game with Cyprus: it teased Cyprus with a loan. The difference was however that the Russian offer to Cyprus did not come as a surprise: Russia had long-standing and close political ties to the island. Russian oligarchs and smaller fries had for years made use of Cyprus as a first stop for Russian money out of Russia. At the end of 2011, Russia had lent €2.5bn to Cyprus. However, the crisis lending did not materialise, any more than it had in Iceland (see my Cyprus story).

The international media reported frequently that the EU and the IMF were reluctant to assist Cyprus because these organisations were irritated by the easy access of Russian funds to and through the island’s banks. A classified German report was said to show how Cyprus had been a haven for money laundering (if that report did indeed exist Germans could and should have used the same diligence to check their own Deutsche Bank!)

After the 2008 collapse in Iceland a credible source told me he had seen a US Department of Justice classified report on money laundering stating that Icelandic banks were mentioned as open to such flows. Given the credibility of the source I have no doubt that the report exists (though all my efforts to trace it have failed). I have however no idea if that report was thoroughly researched or not nor in what context the Icelandic banks were mentioned.

Kaupthing and Usmanov

Some Icelandic banks did have clients from Russia and the former Soviet Union. The only one mentioned in the SICR, is the Uzbek Alisher Usmanov. He turned to Kaupthing in summer of 2008 when he was seeking to buy shares in Mmc Norilsk Adr. According to the SICR the bank also sold Usmanov shares in Kaupthing – by the end of September 2008 he owned 1.48% in the bank.

I am told that Usmanov was not Kaupthing client until in the summer of 2008 (earlier Icelog). Funding was generally drying up but Kaupthing was keen on the connection as it was planning to branch out to Russia and consequently looking for Russian connections.

If Usmanov’s shareholding in Kaupthing comes as surprise it is important to keep in mind that part of Kaupthing’s business model was to lend money to clients to buy Kaupthing shares. This was no last minute panic plan but something Kaupthing had been doing for years.

This model, which looks like a share-parking scheme, is a likelier explanation for Usmanov’s stake in Kaupthing rather than a sign of Usmanov’s interest in Kaupthing. A Kauphting credit committee minute from late September 2008, leaked after the collapse, shows that Kaupthing had agreed to lend Usmanov respectively €1,1bn and $1.2bn. According to Icelog sources the bank failed before the loans were issued.

Fridman, Exista and Baugur/Gaumur

There are two Icelandic links to Mikhail Fridman, through Kaupthing and the investment bank Straumur. Its chairman, largest investor and eventually largest borrower was Björgólfur Thor Björgólfsson.

By 1998, Kaupthing was operating in Luxembourg. In June that year, a Luxembourg lawyer, Francis Kass, appeared twice on the same day as a representative of two BVI companies, Quenon Investments Ltd and Shapburg Ltd, both registered at the same post box address in Tortola. His mission was to set up two companies, both with names linked to the North: Compagnie Financiere Scandinave Holding S.A. and Compagnie Financiere Pour L’Atlantique du Nord Holding S.A. The directors were offshore service companies, owned by Kaupthing or used in other Kaupthing offshore schemes.

These two French-named companies, founded on the same day by the same lawyer, came to play major roles in the Icelandic boom until the bust in October 2008. The former was for some years controlled by Kaupthing top managers until it changed name in 2004 to Meiður and to Exista the following year. By then it was the holding company for Lýður and Ágúst Guðmundsson who became Kaupthing’s largest shareholders, owning 25%. In 2000, the latter company’s name changed to Gaumur. Gaumur was part of the Baugur sphere, controlled by Jón Ásgeir Jóhannesson.

The owners of Exista and Baugur were dominating forces in the years when Icelandic banks and businesses were on their Ikarus flight.

Apart from the UK, the Icelandic business expansion abroad was most noticeable in Denmark. Danish journalists watched with perplexed scepticism as swaggering Icelanders bought some of their largest and most eye-catching businesses. In Iceland, politicians and business leaders talked of Danish envy and hostility, claiming the old overlords of Iceland were unable to tolerate the Icelandic success. They were much happier with the UK press that followed the Icelandic rise rather breathlessly.

In 2006 the Danish tabloid Ekstra bladet wrote a series of articles again bringing up Russian ties. Part of the coverage related to the two Krass companies: Quenon and Shapburg have also set up Alfa companies, part of Mikhail Fridman’s galaxy of on- and offshore companies.

The Danish articles were translated into English and posted on the internet. Kaupthing sued the Danish tabloid, which was forced to retract the articles in order to avoid the crippling costs of a libel case in an English court.

JP Galmond – the fixer who lost his firm

An adversary of Fridman, with Icelandic ties, figures in a long saga where also Usmanov plays a role: the Danish lawyer, Jeffrey Peter Galmond. – Some of the foreign fixers who have worked for ex-Soviet oligarchs have in some cases lost their lives under mysterious circumstance. JP Galmond lost his law firm. His story has been told in the international media over many years (my short overview of the Galmond saga).

Galmond was one of the foreign pioneers in St Petersburg in the early 1990s where he soon met Leonid Reiman, manager at the city’s telephone company. By the end of 1990s many foreign businessmen had learnt there was not a problem Galmond could not fix. Reiman went on to become a state secretary in 1999 when Boris Jeltsin made his Saint Petersburg friend Vladimir Putin prime minister.

By 2000 the Danish lawyer had turned to investment via IPOC, his Bermuda-registered investment fund. The following year he bought a stake in the Russian mobile company Megafon. Soon after the purchase Mikhail Fridman claimed the shares were his. This turned into a titanic legal battle fought for years in courts in the Netherlands, Sweden, Britain, Switzerland, the British Virgin Islands and Bermuda.

In 2004 Galmond’s IPOC had to issue a guarantee of $40m to a Swiss court in one of the innumerable Megafon court cases. The court could not accept the money without checking its origin. An independent accountant working for the court concluded that the intricate web of IPOC companies sheltered a money-laundering scheme. In spring of 2008 IPOC was part of a criminal case in the BVI. That same spring, the Megafon battle ended when Alisher Usmanov bought IPOC’s Megafon shares.

The Megafon battle exposed Galmond as a straw-man for Leonid Reiman who was forced to resign as a minister in 2009 due to the IPOC cases. In 2007, Galmond was forced to leave his law firm due to the Megafon battle; his younger partner Claus Abildstrøm took over and set up his own firm, Danders & More, in 2008.

Galmond’s Icelandic ties

In spite of the international media focus on Galmond, he and his partner Claus Abildstrøm enjoyed popularity among Icelandic businessmen setting up business in Copenhagen. An Icelandic businessman operating in Denmark told me he did not care about Galmond’s reputation; what mattered was that both Galmond and Abildstrøm understood the Icelandic mentality and the need to move quickly.

Already in 2002, Abildstrøm had an Icelandic client, Birgir Bieltvedt, a friend and business partner of both Björgólfur Thor Björgólfsson and Jón Ásgeir Jóhannesson. In 2004 Abildstrøm assisted Bieltvedt, Jón Ásgeir Jóhannesson and Straumur investment bank, where Björgólfsson was the largest shareholder, to buy the department store Magasin du Nord, where Abildstrøm then became a board member.

In 2007, when the IPOC court cases were driving Galmond to withdraw from his legal firm, the Danish newspaper Børsen reported that among Galmond’s clients were some of the wealthiest Icelanders operating in Denmark, such as Björgólfur Thor Björgólfsson and Jón Ásgeir Jóhannesson.

In his book, Ingimar Ingimarsson claimed that Galmond acted as an advisor to Björgólfsson. According to an Icelog source Galmond represented a consortium led by Björgólfsson’s father Björgólfur Guðmundsson when they bought a printing press in Saint Petersburg in 2004. Björgólfsson has denied any ties to Galmond and to Reiman but has confirmed that Abildstrøm has earlier worked for him.

Alfa, Pamplona Capital Management and Straumur/Björgólfsson

Pamplona Capital Management is a London-based investment fund, which in late 2007 entered a joint venture, according to the SICR, with Straumur, an investment bank where Björgólfur Thor Björgólfsson was the largest shareholder, chairman of the board and Björgólfsson-related companies were eventually the largest borrower (SICR).

In 2005 Pamplona had bought a logistics company, ADR-HAANPAA, operating in the Nordic countries, the Baltics, Poland and Russia. In 2007 Straumur provided a loan of €100m to refinance ADR in a structure where Pamplona owned 80.8%, Straumur 7.7% and ADR managers the rest.

Pamplona was set up in 2004 by the Russian Alexander Knaster, who as a teenager had immigrated to the US with his parents. Knaster was the CEO of Fridman’s Alfa Bank from 1998 until 2004 when he founded Pamplona, partly with capital from Fridman. Knaster has been a British citizen since 2009 and has, as several other Russian billionaires living in the UK, donated money, £400.000, to the Conservatives.

Incidentally, Pamplona shares the same London address as Novator, Björgólfsson’s investment fund, according to Companies House data: 25 Park Lane is one of London’s most attractive business addresses.

The Icelandic business model: corrupt patterns v “time is money”

Big banks such as Wachovia and Citigroup have been fined for facilitating money laundering for Mexican gangs. Deutsche Bank as been fined recently for doing the same for Russians with ties to president Trump. All of this involves violating anti-money laundering rules and regulations and this criminal activity has almost invariably only been discovered through whistle-blowers. Since large international banks could get away with laundering money, could something similar have been going on in the Icelandic banks?

The Icelandic Financial Supervisor, FME, was famously lax during the years of the banks’ stratospheric growth and expansion abroad. One anecdotal evidence does not inspire confidence: during the boom years an Icelandic accountant drew the attention of the police to what he thought might be a case of money laundering in a small company operating in Iceland and offshore. The police seemed to have a very limited understanding of money laundering other than crumpled notes literally laundered.

However, the banking collapse set many things in motion. The failed banks’ administrators, foreign consultants and later experts at the Office of the Special Prosecutor have scrutinised the accounts of the failed banks landing some bankers and large shareholders in prison. I have never heard anyone with plausible insight and authority mention money laundering and/or hidden Russian connections.

I do not know if it was systematically investigated but some of those familiar with the failed banks would know that money laundering, though of course hidden, leaves a certain patterns of transactions etc. But most importantly, the banks’ operation in Luxembourg, where in the Kaupthing criminal cases the dirty deals were done, have not been scrutinised at all by Luxembourg authorities.

The Icelandic businessmen most active in Iceland and abroad were famous for two things: complex structures, not an Icelandic invention – and buying assets at 10-20% higher prices than others were willing to offer.

As one Danish journalist asked me in 2004: “Why are Icelanders always willing to pay more than the asking price?” The Icelandic businessmen explained this by “time is money” – instead of wasting time to negotiate pennies or cents it paid off to close the deals quickly, they claimed.

Paying more than the asking price, exorbitant consultancy fees, sales at inexplicable prices to related parties and complicated on- and offshore structures are all known characteristics of systematic looting, control fraud and money laundering – and there are many examples of all of this from the Icelandic boom years. But these features can also be the sign of abysmally bad management.

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In a formal signing ceremony 16 January 2003 a group of Icelandic investors and the German bank Hauck & Aufhäuser purchased shares in a publicly-owned Icelandic bank. Paul Gatti represented the German bank, proudly airing the intension of being a long-term owner together with the Icelandic businessman Ólafur Ólafsson. What neither Gatti nor Ólafsson mentioned was that earlier that same day, at a meeting abroad, their representatives had signed a secret contract guaranteeing that the Icelandic bank Kaupthing, called ‘puffin’ in their emails, would finance the H&A purchase in Búnaðarbanki. A large share of the profit, 57,5 million USD, would accrue to Ólafsson via an offshore company, whereas 46,5 million USD was transferred to the offshore company Dekhill Advisors Limited, whose real owners remain unknown. Thus, Ólafsson and the H&A bankers fooled Icelandic authorities with the diligent help of advisors from Société General. – This 14 year old saga has surfaced now thanks to the Panama Papers. What emerges is a story of deception similar to the famous al Thani story, which incidentally sent Ólafsson and some of the Kaupthing managers involved in the ‘puffin plot’ to prison in 2015. Ólafsson is however still a wealthy businessman in Iceland.

The privatisation of the banking sector in Iceland started in 1998. By 2002 when the government announced it was ready to sell 45.8% in Búnaðarbanki, the agrarian bank, it announced that foreign investors would be a plus. When Ólafur Ólafsson, already a well-known businessman, had gathered a group of Icelandic investors, he informed the authorities that his group would include the a foreign investor.

At first, it seemed the French bank Société General would be a co-investor but that changed last minute. Instead of the large French bank came a small German bank no one had heard of, Hauck & Aufhäuser, represented by Peter Gatti, then a managing partner at H&A. But the ink of the purchase agreement had hardly dried when it was rumoured that H&A was only a front for Ólafsson.

Thirteen years later, a report by Reykjavík District judge Kjartan Björgvinsson, published in Iceland this week, confirms the rumours but the deception ran much deeper: through hidden agreements Ólafsson got his share in Búnaðarbanki more or less paid for by Kaupthing. Together with Kaupthing managers, two Société General advisers, an offshore expert in Luxembourg, Gatti and H&A legal adviser Martin Zeil, later a prominent FDP politician in Bayern, Ólafsson spun a web of lies and deceit. A few months after H&A pretended to buy into Búnaðarbanki the hidden agreements made an even greater sense when tiny Kaupthing bought the much larger Búnaðarbanki. Until Kaupthing collapsed in 2008 Ólafsson was Kaupthing’s second largest shareholder and, it can be argued, Kaupthing’s hidden mastermind.

The H&A deceit turned out to be only an exercise for a much more spectacular market manipulation. In the feverish atmosphere of September 2008, Ólafsson, following a similar pattern as in 2003, got a Qatari sheikh to borrow money from Kaupthing and pretend he bought 5.1% in Kaupthing as a proof of Kaupthing’s strength. Ólafsson was charged with market manipulation in 2015 and sentenced to 4 ½ years in prison, together with Kaupthing managers Sigurður Einarsson, Hreiðar Már Sigurðsson and Magnús Guðmundsson, all partners in Ólafsson’s H&A deceit.

Preparing the ‘puffin plot’

Two SocGen bankers, Michael Sautter and Ralf Darpe, worked closely with Ólafsson from autumn 2002 to prepare buying the 45.8% of Búnaðarbanki the Icelandic government intended to sell. Ólafsson gave the impression that SocGen would be the foreign co-investor with his holding company, Egla. Sautter, who had worked on bank privatisation in Israel and Greece, said in an interview with the Icelandic Morgunblaðið in September 2002 that strong core investors were better than a spread ownership, which was being discussed prior to the privatisation. In hindsight it’s easy to guess that the appearances of Ólafsson’s advisers were part of his orchestrated plot.

But something did not work out with SocGen: by mid December 2002 the bank withdrew from the joint venture with Ólafsson who asked for an extended deadline from the authorities to come up with new foreign co-investors. The SocGen bankers now offered to assist in finding a foreign investor and that’s how Ólafsson got introduced to H&A, Peter Gatti and Martin Zeil.

The privately held H&A came into being in 1998 when two private Frankfurt banks merged: 70% was owned by wealthy individuals, the rest held by BayernLB and two insurance companies.

Until last moment Ólafsson withheld who the foreign investor would be but assuring the authorities there would be one. And lo and behold, Peter Gatti showed up at the signing ceremony 16 January 2003, held in the afternoon in an old and elegant building in Reykjavík, formerly a public library. H&A bought the shares in Búnaðarbanki through Egla, Ólafsson’s holding company, which also meant that Ólafsson was in full control of the Búnaðarbanki shares.

At the ceremony in Reykjavík Gatti played the part of an enthusiastic investor, promising to bring contacts and knowledge to the Icelandic banking sector. To the media Ólafsson in his calmly assuring way praised the German bank, which would be valuable to Búnaðarbanki and Icelandic banking. “We chose the German bank,” he stated, “because they were the best for Búnaðarbanki and for our endeavours.”

The particular benefit for Búnaðarbanki never materialised but the arrangement certainly turned out to be extremely lucrative for Ólafsson and others involved. However, it wasn’t the agreement signed in Reykjavík but another one signed some hours earlier, far from Reykjavík, that did the trick.

The hidden agreements at the heart of the ‘puffin plot’

The other agreement, in two parts, signed far away from Reykjavík told a very different story than the show put on at the old library in Reykjavík.

That agreement came into being following hectic preparation by Guðmundur Hjaltason, who worked for Ólafsson, Sautter and Darpe, Gatti and Zeil, an offshore expert in Luxembourg Karim van den Ende and a group of Kaupthing bankers. The Kaupthing bankers were Sigurður Einarsson, Hreiðar Már Sigurðsson, Steingrímur Kárason, Bjarki Diego and Magnús Guðmundsson who have all been convicted of various fraud and sentenced to prison, and two others, Kristín Pétursdóttir, now an investor in Reykjavík and Eggert Hilmarsson, Kaupthing’s trusted lawyer in Luxembourg. Karim Van den Ende is a well known name in Iceland from his part in various dubious Kaupthing deals through his Luxembourg firm, KV Associates.

The drafts had been flying back and forth by email between the members this group. Three days before the signing ceremony Zeil was rather worried, as can be seen from an email published in the new report. One of his questions was:

Will or can Hauck & Aufhäuser be forced by Icelandic law to declare if it acts on its own behalf or as trustee or agent of a third party?

Zeil’s email, where he also asked for an independent legal opinion, caused a flurry of emails between the Kaupthing staff. Bjarki Diego concluded it would on the whole be best that “as few as possible would know about this.”

But how was the H&A investment presented at the H&A? According to Helmut Landwehr, a managing partner and board member at H&A at the time of the scam, who gave a statement to the Icelandic investigators the bank was never an investor in Iceland; H&A only held the shares for a client. Had there been an investment it would have needed to be approved by the H&A board. – This raises the question if Gatti said one thing in Iceland and another to his H&A colleagues, except of course for Zeil who operated with Gatti.

The offshored profits

The hidden agreement rested on offshore companies provided by van den Ende. Kaupthing set up an offshore company, Welling & Partners, that placed $35.5m, H&A’s part in the Búnaðarbanki share purchase, on an account with H&A, which then paid this sum to Icelandic authorities as a payment for its Búnaðarbanki purchase. In other words, H&A didn’t actually itself finance its purchase in the Icelandic bank; it was a front for Ólafsson. H&A was paid €1m for the service.

Then comes the really clever bit: H&A promised it would not sell to anyone but Welling & Partners – and it would sell its share at an agreed time for the same amount it had paid for it, $35.5m. When that time came, in 2005, the H&A share in Búnaðarbanki was worth quite a bit more, $104m to be precise.

Kaupthing then quietly bought the shares so as to release the profit – and here comes another interesting twist: this profit of over $100m went to two offshore companies: $57.5m to Marine Choice, owned by Ólafsson and $46.5m to a company called Dekhill Partners. Kaupthing then invested Ólafsson’s profit in various international companies.

In the new report the investigator points out that the owners of Dekhill Partners are nowhere named but strong indications point to Lýður and Ágúst Guðmundsson, Kaupthing’s largest shareholders who still own businesses in the UK and Iceland.

At some point in the process, which took around two years, the loans to Welling & Partners were not paid directly into Welling but channelled via other offshore companies. This is a common feature in the questionable deals in Icelandic banks, most likely done to hide from auditors and regulators big loans to companies with little or no assets to pledge.

Who profited from the ‘puffin plot’?

Ólafsson is born in 1957, holds a business degree from the University of Iceland and started early in business, first related to state-owned companies, most likely through family relations: his father was close to the Progressive party, the traditional agrarian party, and the coop movement. Ólafsson is known to have close ties to the Progressives and thought to be the party’s major sponsor, though mostly a hidden one.

Ólafsson was also close to Kaupthing from early on and was soon the bank’s second largest shareholder. The largest was Exista, owned by the Guðmundsson brothers.

There are other deals where Ólafsson has operated with foreigners who appeared as independent investors but at a closer scrutiny were only a front for Ólafsson and Kaupthing’s interests. The case that felled Ólafsson was the al Thani case: Mohammed Bin Khalifa al Thani announced in September 2008 a purchase of 5.1% in Kaupthing. The 0.1% over the 5% was important because it meant the purchase had to be flagged, made visible. To the Icelandic media Ólafsson announced the al Thani investment showed the great position and strength of Kaupthing.

In 2012, when the Special Prosecutor charged Sigurður Einarsson, Magnús Guðmundsson, Hreiðar Már Sigurðsson and Ólafsson for their part in the al Thani case it turned out that al Thani’s purchase was financed by Kaupthing and the lending fraudulent. Ólafsson was charged with market manipulation and sentenced in 2015 to 4 ½ years in prison. He had only been in prison for a brief period when laws were miraculously changed, shortening the period white-collar criminals need to spend in prison. Since his movements are restricted it drew some media attention when he crashed his helicopter (he escaped unharmed) shortly after leaving prison but he is electronically tagged and can’t leave the country until the prison sentence has passed.

The Guðmundsson brothers became closely connected to Kaupthing already in the late 1990s while Kaupthing was only a small private bank. Lýður, the younger brother was in 2014 sentenced to eight month in prison, five of which were suspended, for withholding information on trades in Exista, where he and his brother were the largest shareholders.

Both Ólafsson and the Guðmundsson brothers profited handsomely from their Kaupthing connections. Given Ólafsson’s role in the H&A alleged investment and later in the al Thani case it is safe to conclude that Ólafsson was a driving force in Kaupthing and could perhaps be called the bank’s mastermind.

In spite of being hit by Kaupthing’s collapse Ólafsson and the brothers are still fabulously wealthy with trophy assets in various countries. This may come as a surprise but a characteristic of the Icelandic way of banking was that loans to favoured clients had very light covenants and often insufficient pledges meaning the loans couldn’t be recovered, the underlying assets were protected from administrators and the banks would carry the losses. How much this applied to Ólafsson and Guðmundsson is hard to tell but yes, this was how the Icelandic banks treated certain clients like the banks’ largest shareholders and their close collaborators.

When Ólafsson was called to answer questions in the recent H&A investigation he refused to appear. After a legal challenge from the investigators and a Supreme Court ruling Ólafsson was obliged to show up. It turned out he didn’t remember very much.

Ólafsson engages a pr firm to take of his image. After the publication of the new report on the H&A purchase Ólafsson issued a statement. Far from addressing the issues at stake he said neither the state nor Icelanders had lost money on the purchase. Over the last months Ólafsson has waged a campaign against individual judges who dealt with his case, an unpleasant novelty in Iceland.

The Panama Papers added the bits needed to understand the H&A scam

In spite of Gatti’s presence at the signing ceremony in January 2003 the rumours continued, even more so as H&A was never very visible and then sold its share in Búnaðarbanki/Kaupthing. One person, Vilhjálmur Bjarnason, now an Independence party MP, did more than anyone to investigate the H&A purchase and keep the questions alive. Some years later, having scrutinised the H&A annual accounts he pointed out that the bank simply couldn’t have been the owner.

Much due to Bjarnason’s diligence the sale was twice investigated before 2010 by the Icelandic National Audit Office, which didn’t find anything suspicious. The investigation now has thoroughly confirmed Bjarnason’s doubts.

Both in earlier investigations and the recent H&A investigation Icelandic authorities have asked the German supervisors, Bundesanstalt für Finanzdienstleistungsaufschicht, BaFin, for information, a request that has never been granted. During the present investigation the investigators requested information on the H&A ownership in 2003. The BaFin answer was that it could only give that information to its Icelandic opposite number, the Icelandic FME. When FME made the request BaFin refused just the same – a shocking lack of German willingness to assist and hugely upsetting.

The BaFin seems to see its role more as a defender of German banking reputation than facilitating scrutiny of German banks.

The Icelandic Special Investigative Commission, SIC, set up in December 2008 to investigate the banking collapse did investigate the H&A purchase, exposed the role played by the offshore companies but could not identify the owners of the offshore companies involved and thus could not see who really profited.

The Panama leak last year exposed the beneficial owners of the offshore companies. That leak didn’t just oust the then Icelandic prime minister Sigmundur Davíð Gunnlaugsson, incidentally a leader of the Progressive party at the time but also threw up names familiar to those who had looked at the H&A purchase earlier.

Last summer, the Parliament Ombudsman, Tryggvi Gunnarsson who was one of the three members of the SIC made public he had new information regarding the H&A purchase, which should be investigated. The Alþingi then appointed District judge Kjartan Björgvinsson to investigate the matter.

By combining data the SIC had at its disposal and Panama documents the investigators were able to piece together the story above. However, Dekhill Partners was not connected to Mossack Fonseca where the Panama Papers originated, which means that the name of the owners isn’t found black on white. However, circumstantial evidence points at the Gudmundsson brothers.

How relevant is this old saga of privatisation fourteen years ago?

The ‘puffin plot’ saga is still relevant because some of the protagonists are still influential in Iceland and more importantly there is another wave of bank privatisation coming in Iceland. The Icelandic state owns Íslandsbanki, 98.2% in Landsbanki and 13% in Arion.

Four foreign funds and banks – Attestor Capital, Taconic Capital, Och-Ziff and Goldman Sachs – recently bought shares in Arion, in total 29.18% of Arion. Kaupskil, the holding company replacing Kaupthing (holding the rest of Kaupthing assets, owned by Kaupthing creditors) now owns 57.9% in Arion and then there is the 13% owned by the Icelandic state.

The new owners in Arion hold their shares via offshore vehicles and now Icelanders feel they are again being taken for a ride by opaque offshorised companies with unclear ownership. In its latest Statement on Iceland the IMF warned of a weak financial regulators, FME, open to political pressure, particularly worrying with the coming privatisation in mind. The Fund also warned that investors like the new investors in Arion were not the ideal long-term owners.

The palpable fear in Iceland is that these new owners are a new front for Icelandic businessmen like H&A. Although that is, to my mind, a fanciful idea, it shows the level of distrust. Icelanders have however learnt there is a good reason to fear offshorised owners.

The task ahead in re-privatising the Icelandic banks won’t be easy. The H&A saga shows that foreign banks can’t necessarily be trusted to give sound advice. The new owners in Arion are not ideal. The thought of again seeing Icelandic businessmen buying sizeable chunks of the Icelandic banks is unsettling, also with Ólafsson’s scam with H&A in mind.

It’s no less worrying seeing Icelandic pension funds, that traditionally refrain from exerting shareholder power, joining forces with Icelandic businessmen who then fill the void left by the funds to exert power well beyond their own shareholding. Or or… it’s easy to imagine various versions of horror scenarios.

In short, the nightmare scenario would be a new version of the old banking system where owners like Ólafsson and their closest collaborators rose to become not only the largest shareholders but the largest borrowers with access to covenant-light non-recoverable loans. Out of the relatively small ‘puffin plot’ Ólafsson pocketed $57.5m. The numbers rose in the coming years and so did the level of opacity. Ólafsson is still one of the wealthiest Icelanders, owning a shipping company, large property portfolio as well as some of Iceland’s finest horses.

In 2008, five years after the banks were fully privatised the game was up for the Icelandic banks. The country was in a state of turmoil and it ended in tears for so many, for example the thousands of small investors who had put their savings into the shares of the banks; Kaupthing had close to 40.000 shareholders. It all ended in tears… except for the small group of large shareholders and other favoured clients that enjoyed the light-covenant loans, which sustained them, even beyond the demise of the banks that enriched them.

Obs.: the text has been updated with some corrections, i.a. the state share sold in 2003 was 45.8% and not 48.8% as stated earlier. 

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It beggars belief: over eight years from a calamitous financial crash in Iceland, much to do with failed financial supervision, there is still reason to worry about financial supervision in Iceland. Or rather, there is again reason to worry now that the sheltering capital controls are for all intents and purposes abolished Iceland. All of this, according to the latest IMF Concluding Statement of the 2017 Article IV Mission on Iceland. To Icelog Ashok Vir Bhatia who led the IMF mission says that “worried” wouldn’t be the right word regarding the Icelandic financial supervision but there certainly was cause for concern, as the Statement reflects.

‘The economy of Iceland is doing very well,’ Ashok Vir Bhatia said to Icelog today. With growth of 7% of GDP Iceland is clearly doing well indeed. This rapid growth might be another cause for concern but according to Bhatia the growth seems sustainable.

In short, this is the IMF summary:

What the IMF is worried about, is political pressure on Fjármálaeftirlitið, FME, the Icelandic supervisory authority. FME “is not sufficiently insulated from the political process.” The outline of political pressure is there to see. FME needs to go hat in hand to the Parliament every year to beg for a slice of the budget. The present chairman of the board, appointed by prime minister Bjarni Benediktsson during his time in office as a minister of finance, is a young ex-banker; difficult to imagine anyone with her CV in the same position with any regulator in the neighbouring countries.

In Iceland, the IMF Statement will be read with the people at FME in mind, how fit they are at their job. From the point of view of the IMF this criticism is about institutions, not people. If the institutional framework is robust, there is less scope for political pressure. As it is, the institutional frame isn’t as robust as it should be – and that’s what the IMF is emphasising here.

Banks and ownership is one thing to worry about now that things in Iceland will slowly be normalised, post controls. The fear is that the old normal – few big shareholders in each of the three largest banks, not only the largest owners but also the largest borrowers – will be normal again.

The recent purchase of creditors of Arion (via Kaupskil the holding company of Kaupthing) all through totally opaque offshore vehicles, has led to a furious debate in Iceland of fit and proper owners. Here the FME took a rather weak stance as to identifying beneficial owners, after all these new owners have been in Iceland for some years, not exactly new faces.

The new owners are Taconic Capital Advisors, Attestor Capital, Och-Ziff Capital Management Group and Goldman Sachs. Reading between the lines the IMF Statement indicates these are not necessarily ideal bank owners: ‘The recent purchase of the one privately owned pillar bank poses a test for Fjármálaeftirlitid. Financial stability considerations and fairness require that the mandatory fit and proper assessment be thorough, uncompromising, and evenhanded.’

The phenomenal, compared to other European countries, growth of the Icelandic economy is mainly due to tourism and as Bhatia points out to Icelog experience from other countries suggests that tourism doesn’t normally vanish over night. ‘The effect is not just temporary. Tourism is fundamentally good for the economy, a real blessing.’

In Iceland, the attitude towards the booming tourism has been that surely this is like the herring: it comes and goes and while it’s there it should just be exploited. This is answered in the new Statement: ‘Evidence from elsewhere suggests the shoal of tourists is not about to swim away abruptly: tourists are not herring.’ – The Statement emphasises the need for holistic tourism strategy.

A real friend is the one who doesn’t shy away from criticising – this old Icelandic saying comes to mind reading the latest IMF Statement on Iceland.

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Now that ordinary Icelanders can invest ISK100m abroad a year and buy one property abroad, life is returning back to normal after capital controls or at least for the 0.01% of Icelanders that will be able to make use of this new normal. This new CBI regime was put in place on the last day of 2016.

For all others, capital controls have for a long time not been anything people sensed in everyday life. The controls really were on capital, in the sense that Icelanders could not invest abroad, but they could buy goods and services, i.e. ordered stuff online and, mostly relevant for companies, paid for foreign services.

The almost only tangible remains of the capital controls regard the four large funds – Eaton Vance, Autonomy, Loomis Sayles and Discovery Capital Management – still locked inside the controls with their offshore króna (by definition króna owned by foreigners, i.e. króna owned by foreigners who potentially want to exchange it to foreign currency).

I’ve written extensively on this issue earlier, recently with a focus on the utterly misplaced ads regarding the policy of the Icelandic government (the policy can certainly be disputed but absolutely not in the way the ads chose to portray it; see here and here; more generally here). From over 40% of GDP end of November 2008, when the controls were put in place, the offshore króna amounted to ca. 10% of GDP towards the end of 2016 (see the CBI: Economy of Iceland 2016, p. 75-81.) The latest CBI data is from 13 January this year, showing the amount of offshore króna at ISK191bn, below 10% of GDP.

It now seems there have been high-level talks and as far as I can understand there is great willingness on both sides to find an agreement, which would most likely involve an exit rate somewhat less favourable than the present rate (meaning there would be some haircut for the funds, i.e. some loss) and also that they would exit over some period of time (they have earlier indicated that they are in no hurry to leave).

As before, the greatest risk here is political: will the opposition or parts of it, try to use this case to portray the government as dancing to the tune of greedy foreigners? Icelanders have had a share of the populism so prevalent in other parts of the world but Icelandic politics is by no means engulfed by it.

Arguments in this direction can’t be ruled out but the argument for solving the issue is that Iceland should be moving out of the long shadows of the 2008 collapse, the Central Bank has been buying up foreign currency in order to fetter the ever-stronger króna and this is a problem easier to solve now with the economy booming rather than at some point later in a more uncertain future.

Obs.: on 4 June 2016 the CBI announced a new instrument to “temper and affect the composition of capital inflows.” Some people call this a new form of capital controls. I don’t agree and see these measures, as does the CBI, as a set of prudence rules, announced as a possible course of action already in 2012. Over the last decades other countries have taken a similar course to prevent the inflow of capital that could in theory leave quickly.

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It took Bjarni Benediktsson leader of the Independence Party 73 days and three attempts to form a government with two small centre-right parties, Bright Future (Björt Framtíð) and the Reform Party (Viðreisn). The majority is the tiniest possible: one seat. And so is the enthusiasm for the new government, really tiny. New opinion poll shows that 25% is content with the government. The left opposition lost an opportunity to form a government, the voters of the two small coalition parties feel they were cheated into securing an Independence Party rule and the latter party is sour because the government seems weak and Southern Iceland that brought the party most votes got no minister(s). – Thus starts the life of a new government, with irritation and anger. Things can only get better or there will be early elections, again.

In the history of Icelandic politics since the founding of the republic in 1944 political instability hasn’t been dominant. Icelanders got through the 2008 banking collapse but shed the collapse government after a winter of protests, which felt more playful than threatening, hence the cute name of the ‘Pots and pans’ revolution. When the left government, voted to power in the spring of 2009, survived a whole parliament term of four years in spite of fierce infighting it seemed that Iceland was back to stability.

Even more so since the new centre right coalition led by the Progressive Party, with the Independence Party had a safe majority, 38 out of 63 seats. The Panama papers shattered that strength April 3 2016. The day after prime minister Sigmundur Davíð Gunnlaugsson stumbled through the now world famous interview and tried to lie his way out of the revealing questions Bjarni Benediktsson signalled the end of Gunnlaugsson’s government by refusing to back Gunnlaugsson. Two days after the interview Gunnlaugsson resigned, ending the politically weirdest 48 hours Icelanders had ever witnessed.

After a political limbo from spring 2016 to autumn came the October 29 election and 73 days later a new government. None of this signals strength. The new government starts its life with bets against it enduring a full term.

EU: both a raison d’etre and a non-issue

The main reason for former Independence Party voters or right-leaning social democrats to vote for Reform (it seems mainly to have taken voters from the latter, many pro-EU voters had already left the IP in the last two elections) was to secure an action regarding an Icelandic EU membership. Reform was founded by angry IP voters who felt the grand old party had been less than grand in going back on its promise of a referendum.

But this raison d’etre for Reform has now turned into a non-issue, both because many Icelanders want to see how Brexit fares and also because EU is not a pressing issue for booming Iceland.

The Reform party: born out of pro-EU sentiments

The broken promise, which spurned some political enthusiasts into action, was a promise that IP leader Bjarni Benediktsson gave before the 2013 elections. In 2009, the social democrats, buoyed by their election victory and the prime minister post, fulfilled their long-standing promise of applying for EU membership. The Left Greens, their coalition partner, was against membership but the social democrats didn’t take no for an answer.

Up to the 2013 elections IP’s Benediktsson, whose party is split on EU, said holding a referendum asking voters if they wanted to continue membership negotiations was the best way to test voters’ EU sentiments. When in government with the Progressives, who had in principle supported such a vote though the party is fiercely anti-EU, Benediktsson suddenly saw nothing but a ‘political impossibility’ in holding such a vote as both coalition parties were against EU membership.

This caused huge outrage and protests for weeks – there has never been a clear majority in opinion polls to join the EU but this time, there was a huge majority for finalising a membership agreement and then vote on it. This anger spurred pro-EU former Independent party-member Benedikt Jóhannesson to form Reform. The Icelandic name, ‘Viðreisn,’ means ‘Revival’ rather than ‘Reform.’ In Icelandic politics the word refers to a period in Icelandic history, end of the 1950s and 1960s, when IP was in government with the social democrats, seen as a time of prosperity and growth in Iceland.

Now: Icelandic EU membership – let’s forget it

After being so wedded to an EU membership many feel that Jóhannesson and BF’s leader Óttarr Proppé have turned very meek in front of the IP’s EU antipathy. All there is left of a promise of a referendum is this: ‘The government parties agree that if the subject of a referendum on accession negotiations with the European Union is raised in the Althingi, the issue will be put to a vote and finalised towards the end of the electoral period. The government parties may have different opinions on this matter and will respect each other’s views.’

This indicates that well, maybe the matter won’t be raised and then there will be no referendum. However, Reform’s MP Jón Steindór Valdimarsson, a prominent advocate for Icelandic EU membership, has stated that people can rest assured: EU membership will be brought up in the Alþingi. And also, that the parties have agreed to disagree when a referendum will be brought to a vote.

EU membership is not a hot topic in Iceland but the anger still simmers against the last government’s blatant change-of-plan. This means that this very feeble promise on the issue is seen as an abject failure by the two small parties to stick to their EU focus; effectively that the IP bulldozed over them.

‘System change’

One of the most prominent words before the election last October was ‘system change’ – in short, the new parties – i.e. Reform, Bright Future and the Pirates – advocated ‘system change’ whereas the ‘four-party’ as the old parties are called in Icelandic – IP, the Progressives, the social democrats and Left Green – sounded less enthusiastic.

The word mostly referred to fundamental changes in how to allot fishery quotas and farming subsidies, i.e. policies concerning the two old sectors in the Icelandic economy. Two sectors still shaped by the political climate of earlier decades though their part of the economy has dwindled – now, tourism is both the largest sector and the growth sector.

Reform advocated what it called ‘the market approach’ to both these old sectors. Fishing quotas should to a certain degree be auctioned off in order to increase the national profit of fisheries, i.e. levies and taxes, akin how the Faroese have done.

This ambition has been whittled down in the new government’s ‘Platform:’ “The government considers that the benefits of the catch quota system are important for continuing creation of value in the fishing industry. Attention will be given to the benefits of basing the system on long-term agreements rather than allocations without time limits; at the same time, other possible choices will be examined, such as market-linking, a special profit-based fee or other methods to better ensure that payment for access to this common resource will be proportional to the gains derived from it. The long-term security of operations in the sector and economic stability in the rural areas must be ensured.”

Those who advocate changed agricultural policy, away from subsidies to a more consumer-friendly, less protective agriculture, with more import of foreign agricultural produce find this statement very weak: “The allocation of import quotas must be revised and the premise for the dairy industry’s derogations from competition law must be analysed and suitable amendments made.”

The government may surely surprise Icelanders but so far, there is little to indicate that the new parties will be allowed to make a strong departure to the way the IP has run the basic industries for decades.

Feeble vision on tourism

The previous Progressive-led government lost three precious years where the fastest growing most cash-giving industry, tourism, blossomed but without any policy guidelines as to what sort of tourism Iceland wants to pursue. The previous government seemed to be beholden to the interests of certain companies: it couldn’t solve the problem of identifying the most pressing infrastructure projects nor was it able to decide on a levy-structure in tourism. Truly a phenomenal omission.

The new government is worryingly vague on its aims for tourism in Iceland, only two sentences on it in its ‘Platform:’ The importance of tourism as an occupational sector is to be  reflected in the administration’s tasks and long-term policy-making. In the years to come, emphasis will be placed on projects that will be conducive to harmonised management of tourism, research and reliable gathering of data, increased profitability of the sector, the spread of tourists to all parts of the country, and rationalised levying of fees, e.g. in the form of parking fees.

Is parking fees the only grand idea of funding? Then that’s worryingly limited and unambitious.

At the same time Iceland is clearly becoming immensely dependent on tourism. With hotels sprouting everywhere there are whispers in the banking sector that further lending to tourism-related projects should be severely conservative.

The truly revolutionary turn: no more polluting heavy industries

Many Icelanders are worried that the aspect of clean and pure nature is hugely compromised by several recent heavy-polluting industries around Iceland in addition to the old ones. Hidden in the three-paragraphs on ‘Environment and Natural Resources’ there is this sentence: ‘There will be no new concessionary investment agreements for the building of polluting heavy industry.’

This may not seem much but in the Icelandic context this is truly revolutionary: a sharp turn from decades of striving to attract heavy polluting industries to Iceland, often with investment agreement granting some form of governmental favours. It can’t be emphasised too much what a turnaround this is – yes, truly revolutionary.

Clear right-leaning policy with a social slant

Although the government advocates responsible housekeeping and financial stability there is also some focus on social matters. Benedikt Jóhannesson has mentioned that Iceland is competing with its Nordic neighbours in holding on to young Icelanders, of getting them to return home from studying abroad or keeping them at home instead of moving abroad.

Jóhannesson has very correctly identified this problem: Icelanders do indeed compare their standard of living to their Nordic neighbours – and Iceland falls short in many aspects.

One policy advocated by the new government is to adapt Icelandic study loans to the system in the other Nordic countries: ‘A scholarship system based on the Nordic model will be adopted and lending from the Student Loan Fund will be based on full cost of living support and incentives for academic progress. Consideration will be given to the social role of the Fund. – This seems a more costly option then the present student loan system and the extra funds needed haven’t been specified as far as I know.

Immigrants are less skilled than Icelanders who emigrate

One potential danger is the above: the mismatch in outflow and inflow of people. The booming tourism needs a lot of low-skilled work, now largely provided by foreign workers whereas educated or highly skilled Icelanders have been tempted to emigrate or don’t return after studying abroad but choose to find work after finishing their studies.

In the 2015 OECD Economic Survey of Iceland this problem is spelled out: ‘The current boom is based to some extent on the rapid development of the tourism sector. With one million visitors in 2014, this is welcome, but it tends to create relatively low-skilled low-wage jobs and comes with limited opportunities for productivity growth. Against the draw of migrants to the booming low-skill jobs, the Icelandic economy is experiencing outmigration of high-skilled people. Furthermore, unemployment amongst university graduates is rising, suggesting mismatch. As such, and despite the economic recovery, Iceland remains in transition away from a largely resource-dependent development model, but a new growth model that also draws on the strong human capital stock in Iceland has yet to emerge.’

This wasn’t at all welcome news in Iceland and it was clear that some politicians are in denial about this mismatch. Icelanders, especially politicians, like to portray Iceland as a country with highly skilled workforce. At a closer look, comparing higher education in Iceland to the neighbouring countries, this isn’t really true. And the above paragraph proved an unpalatable course (as I sensed when reporting for Rúv I brought this up: there was some attempt from political quarters to rubbish the OECD data.)

Therefore it’s particularly refreshing to hear Jóhannesson mention this fact – that Iceland is indeed in many ways struggling to maintain skilled people and people with higher education. Whether something sensible comes out of it remains to be seen but acknowledging the problem is a promising first step.

Will the government last the full parliamentary term?

It’s too early to tell, so far so eventless. Or well, not quite. As a minister of finance Bjarni Benediktsson reacted to the Panama leak – which cost Sigmundur Davíð Gunnlaugsson both his prime minister post and leadership of his party, the Progressives and showed that also Benediktsson had offshore connections – by setting up a taskforce in mid June to estimate Icelandic assets offshore and the loss to the Treasury caused by the Icelandic offshorisation.

The taskforce handed in its report on September 13 and gave a presentation to Benediktsson on October 5. On October 10 Benediktsson said in Alþingi the report would be published in the next few days but nothing happened. It wasn’t until January 6 that the report was unceremoniously published on the ministry’s website and sent to the Alþingi economy and trade committee – after some journalists and politicians had said they would demand access by using the Icelandic Freedom of Information act.

When questioned Benediktsson brusquely denied there had been any cover-up, the report had simply come too late to be discussed in the outgoing parliament. A day later, Benediktsson was forced to retract his words and apologise: there had indeed be enough time to present it before the elections. Notably, elections called because of offshorisation. – Benediktson, now prime minister, has recently refused to discuss the report with the Alþingi economy and trade committee but says he will discuss its finding when the report will be debated in Alþingi.

This wasn’t a glorious end to Benediktsson’s time as minister of finance and the beginning of his reign as prime ministers. His opponents talk of his attempted cover-up, others that this is his typical lack of attention to details, a certain carelessness and sloppiness.

Governing in good times – not as easy as it seems

Politicians in power in times of crisis and hardship may at times dream of the sweetness of power in good times. In Icelandic we say that it takes strong bones to survive prosperity. That’s exactly the challenges facing Iceland for the time being.

The GDP growth last year was around 4%, unemployment is 4%, building cranes crowed the Reykjavík city scape, the Central Bank is facing losses because of the foreign currency it’s hording to keep the króna, now record strong, from being even stronger – all of this both signs of prosperity and challenges. Right now, fishermen have been striking since mid December, no end in sight. They are both demanding substantial wage increases, which the fishing industries refuse to meet and that the government reinstalls earlier tax deductions, flatly denied by minister of finance Jóhannesson.

In spite of good times in Iceland there is a permanent political chill over the island for the time being. It remains to be seen if the new government finds the way to melt the chill without ending up with an overheated and out-of-control economy – a far too familiar phenomenon in the prone-to-bumpy-ride Icelandic economy.

There are eleven ministers and eight ministries in the new Icelandic government – from the Independence Party (6): party leader and prime minister Bjarni Benediktsson, Kristján Þór Júlíusson minister of Education, Science and Culture, Þórdís Kolbrún Reykfjörð Gylfadóttir minister of Tourism, Industries and Innovation (Ministry of Industries and Innovation), Guðlaugur Þór Þórðarson minister of foreign affairs, Sigríður Ásthildur Andersen minister of Justice (Ministry of the Interior), Jón Gunnarsson minister of Transport and Local Government (Ministry of the Interior); Reform Party (3): party leader and minister of Finance Benedikt Jóhannsson, Þorsteinn Víglundsson minister of Social Affairs and Gender Equality (Ministry of Welfare), Þorgerður Katrín Gunnarsdóttir minister of Fisheries and Agriculture (Ministry of Industries and Innovation); Bright Future (2): party leader Óttarr Proppé minister of Health (Ministry of Welfare), Björt Ólafsdóttir minister for the Environment and Natural Resources. – Only ministries with two ministers are mentioned above. The government has announced that it plans to split the Ministry of the Interior into Ministry of Justice and Ministry of Transport and Local Government, which means there will soon be nine ministries. – I have earlier used the name “Revival” for Viðreisn without noticing that on its English website “The Reform Party” is the name used. 

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“Epic success! There are a lot of coalition possibilities” tweeted elated newly elected Pirate MP Smári McCarthy the morning after polling day. Quite true, the Pirates did well, though less well than opinion polls had indicated. Two of the four old parties, the Left Greens and the Independence Party could also claim success. The other two oldies, the Progressives and the Social Democrats, suffered losses. Quite true, with Bright Future and the new-comer Viðreisn, Revival, in total seven instead of earlier six parties, there are plenty of theoretical coalition possibilities. But so far, the party leaders have been eliminating them one by one leaving decidedly few tangible ones. Unless the new forces manage to gain seats in a coalition government Iceland might be heading towards a conservative future in line with its political history.

In spite of the unruly Pirates and other new parties the elections October 29 went against the myth of Iceland abroad as a country rebelling against old powers – the myth of a country that lost most of its financial system in a few days in October 2008 instead of a bailout, then set about to crowd-write a new constitution, investigate its banks and bankers and jailing some of them and is now, somehow as a result of all of this, doing extremely well.

True, Iceland is doing well – mostly due to pure luck: low oil prices, high fish prices on international markets and being the darling of discerning well-heeled tourists. No new constitution so far and at a closer scrutiny the elections results show a strong conservative trend, in line with the strong conservative historical trend in Icelandic history: during the 72 years since the founding of the Icelandic republic in 1944 the Independence Party has been in government for 57 years, most often leading a coalition and never more than two to three years in opposition except when the recent left government kept the party out in the cold for four years, 2009 to 2013.

The results: historic shift to new parties 

(From Iceland Monitor)

With 63 MPs the minimum majority is 32 MPs.

Of the seven parties now in Alþingi four are seen as the old parties – Independence Party, Left Green, Progressives and the social democrats – in Iceland often called the “Four-party.” Their share of the votes was 62%, the lowest ever and down from 75% in the 2013 elections, meaning that the new parties grabbed 38%. A historic shift since the old parties have for decades captured 80-90% of the votes. The Four-party now has 42 seats, the new-comers 21 seats.

The left government 2009 to 2013: an exception rather than a new direction

As strongly as the Nordic countries have been social democratic Iceland has been conservative. And still is. Iceland is not living up to its radical image and the left government of 2009 to 2013 was more the exception than a change of direction. The present outcome shows no left swing but the swing to the new parties may prove to be a game changer in Icelandic politics.

The left parties, Left Green and the social democrats, now have thirteen seats, compared to sixteen in 2013, the centre/neither-left-nor-right Bright Future, the Pirates and the Progressives have 22 seats, 28 in 2013 but the right/conservative parties, the Independence Party and Revival, are the largest faction with 28 seats, up from nineteen in 2013. – As I heard it put recently in Iceland there are Progressive-like conservatives in all parties and the Progressives tend to strengthen the worst sides of the Independence Party, such as illiberal cronyism.

With seven parties in Alþingi, the Icelandic Parliament, up from six during recent parliamentary term, the party game of guessing the possible coalition, both in terms of number of MPs and political synergies, is now on in Iceland.

A right centre outcome seems more likely than a left one

It’s the role of the president to decide which leader gets the mandate to form a government, normally the leader of the largest party but other leaders are however free to try. The task facing the newly elected president Guðni Th. Jóhannesson, a historian with the Icelandic presidency as his field of expertise, seems a tad complicated.

The president followed the traditional approach and gave the mandate to Bjarni Benediktsson leader of the largest party, the Independence Party who first met with the Progressive’s Sigurður Ingi Jóhannsson who lead the Progressive-Independence coalition that has just resigned. The two parties now only have 29 seats between them. – Given the right-leaning/conservative weight in Alþingi a right-centre government might seem more likely than a left government.

The leader of Bright Future Óttar Proppé, seen as a possible coalition partner for the conservatives, seemed surprisingly unenthusiastic: to him a coalition with the Independence Party and Revival “doesn’t seem like an exciting option,” adding that there is a large distance policy-wise between his party and the largest one.

Proppé had earlier suggested to the president that Revival’s leader Benedikt Jóhannesson be given the mandate; Jóhannesson has already suggested he’s better poised to form a government than Benediktsson since Revival can appeal both to left and right.

Katrín Jakobsdóttir leader of the Left Green has stated that her party would be willing to attempt forming a five party centre-left coalition, i.e. all parties except the Independence Party and the Progressives, a rather messy option. The Pirates leader Birgitta Jónsdóttir has said her party could defend a minority left government.

Four winners

Since the founding of the Republic of Iceland in 1944 the Independence Party has always been the country’s largest party and the one most often in government. Its worst ever result was in the 2009 elections, when it got only 16 seats. Getting 19 in 2013 and 21 seats now may seem good but it’s well below the now unreachable well over 30% in earlier decades. Yet, gaining two seats now makes the party a winner.

Its leader Bjarni Benediktsson sees himself as the obvious choice to form a coalition, given the support of his party but it will strongly test his negotiation skills. In the media he comes across as rather wooden but he’s popular among colleagues, which might make his task easier though he can’t erase policy issues unpopular with the other parties such as the parties anti-EU stance and being the watchdog of the fishing industry.

The Left Green Movement was formed in 1999 when left social democrats split from the old party and joined forces with environmentalists. The Left Green has always been the small left party but is now the largest left party next to the crippled social democrats. The elf-like petite Katrín Jakobsdóttir has imbued the party with fresh energy. Her popularity, far greater than the results of the party, no doubt helped secure a last minute swing against predictions. She has been the obvious candidate to lead a left-leaning government, now an elusive opportunity.

Viðreisn, Revival, is a new centre right party, running for the first time but founded in disgust and anger by liberal conservatives from the business community. In general they felt the Independence Party was turning too illiberal, too close to the fishing industry so as to lose sight of other businesses.

But most of all the Revivalists were angered by the broken promises of the Independence Party in 2013 regarding EU membership. During the 2013 campaign the party tried to ease out of taking a stance on EU by promising to hold a referendum asking if EU membership negotiations should be continued. Once in government the Independence Party broke this promise causing weeks of protests and widespread anger some of which Revival captured.

Revival’s founder Benedikt Jóhannesson was seen as an unlikely leader and admitted as much to begin with but has proved an adept leader, also by attracting some strong and well-known candidates from the Icelandic business community. Getting seven MPs in its first run spells good for the party but history has shown that getting elected is the easy part compared to keeping a new party functioning in harmony. However, the Revival’s energetic start has for the first time in decades given the Independence Party a credible competition on the right wing.

The outcome has made Jóhannesson flush with success and he was quick to put his name forward as the right person to form and lead a centre right government. Revival did no doubt capture some Independence party voters but many of them had already defected to the social democrats now leaving that party for Revival.

The Pirate Party is the winner who lost the great support shown earlier in opinion polls, probably never a likely outcome; growing from three MPs to ten is the success McCarthy tweeted about. The party rose out of protests and demonstrations after the 2008 calamities and ran for the first time in 2013, winning three seats.

Their feisty leader Birgitta Jónsdóttir, with 32.000 Twitter followers and foreign fame for her involvement with Wikileaks and Iceland as a data protection haven, is unlikely to be the first Pirate prime minister in the world. Given that the party has had some in-house friction to deal with – they had to call in an occupational psychologist to restore working relations – the unity of the parliamentary group might be in question, making the party less appealing for others as a coalition partner.

Two losers and one survivor

The Social Democrats suffered a crushing defeat, even worse than the opinion polls had predicted and worse than the dismal outcome in 2013. As parties consumed with infighting – the UK Labour Party springs to mind – the energy of the Social Democrats has been wasted on infighting at the cost of a constructive election campaign. Common to other sister parties in Europe the Icelandic Social Democrats have not been able to come up with a convincing policy and its standing with young people is low.

Party leader Oddný Harðardóttir struggled with her speech on election night when all she seemed to be able to think of was that the party once had a good cause; the long list of helping hands she named sounded like each and every of the few voters left. Harðardóttir has now inevitably resigned, giving space for more destructive infighting. Some wonder if the party will survive, others speculate its remains will unite with the Left Green and restore unity and strength on the left wing. Historically seen, the Icelandic left has always split when it grew, adding strength to the right wing and the indomitable Independence Party.

The Progressive Party has lost its incredible upswing of nineteen MPs in 2013 to a much more plausible eight MPs. Plausible, because its upswing to 24% in 2013 was built on cheap promises made by its leader Sigmundur Davíð Gunnlaugsson that brought him all the way into the Prime Minster’s office. But the votes had hardly been counted in 2013 when voters started to lose faith in the party: it has been on a downward slide towards a more natural, in a historical perspective, just over 10% shares of votes.

This old agrarian centre party, sister party of other old Nordic centre parties of similar origin, has traditionally been related to the Icelandic now mostly defunct cooperative movement and still close to certain special interests in agriculture and fishing. Its strength was to appeal to both the left and the right but under Gunnlaugsson it turned more nationalistic/right-leaning, trying to appeal equally to urbanistas and racists and not only old farmers. His successor, representing more traditional Progressive policies might revert to the old party roots, yet needing to find a modern twist for an old party slowly losing ground.

The Panama Papers exposed Gunnlaugsson as a cheat – he had kept quiet about the infamous Wintris, the offshore company he owned with his wife, meaning the couple had huge assets abroad as Icelanders were locked inside capital controls – and a liar as he tried to ease out of the story. He lost his office and then lost his leadership of the party only shortly before the elections. After the elections he claimed to have had a campaign plan, which would have taken the party to 19%. “A bad loser” commented one Progressive ex-MP. Gunnlaugsson’s successor Sigurður Ingi Jóhansson dryly said Gunnlaugsson had not shared this plan with the party leadership.

Bright Future is one of several parties that rose out of protests following the 2008 banking collapse, partially an offspring of the group close to Jón Gnarr the comedian-turned-mayor of Reykjavík 2010 to 2014. It was the new political darling in 2013, securing six MPs. Seen as a centre left liberal party its leader Óttar Proppé is a soft-spoken intelligent politician. The party has recently been hovering around the 5% limit needed to secure a seat in Alþingi but did in the end better than forecasted, losing only two of six seats. Consequently, the party still has a future in Icelandic politics and possibly even a bright one as it might be essential whatever part of the political spectre a coalition will cover.

Scrabbling with numbers – the eliminated options

Juggling parties and numbers of MPs – the minimum majority is 32 MPs – there are in total seventeen possible combinations for a coalition. Although the Progressives have traditionally been a true centre party appealing to left and right, the first elimination seems to be the Progressive Party, unless a path is found around one specific hindrance: the former party leader.

Were the Progressives offered to be in a coalition and given that Gunnlaugsson is an MP it’s almost unthinkable to form a government without him as a minister; but it seems equally unthinkable that the other parties would want to be in government with him. His career as a prime minster has given all but his ardent admirers the feeling that he is shifty and untrustworthy. His admirers will say that opponents fear his toughness.

In spite of losses the Progressive leadership is eager to get into government but Progressive leader Jóhannsson has so far evaded answering if the party could join a coalition without Gunnlaugsson as a minister. There are speculations that the parliamentary group is split: some support Gunnlaugsson, others his successor but some are now speculating that the party would indeed willingly sacrifice Gunnlaugsson in order to get into government again.

Both Left Green Katrín Jakobsdóttir and the Pirates’ Birgitta Jónsdóttir have excluded joining a government with or lead by the Independence Party. When Jónsdóttir went to meet Benediktsson, holding court to hear views of all the parties, she said she doubted that his party was interested in fighting corruption, a key Pirate issue.

Revival’s Benedikt Jóhannesson excluded reviving the present government of Progressives and the Independence Party by joining them. – Thus, the realistic possibilities seem quite fewer than the theoretical ones.

Scrabbling with numbers – the realistic options

Out of the flurry of the first days and considering parties and policies the most realistic combination seemed to be a government with the Independence Party, Bright Future and Revival. That poses an existential dilemma for Revival: though ideologically close to the Independence Party there is this one marked exception – the EU stance.

In the same vein as the British conservatives, to whom the Independence Party is much more similar than to its Nordic sister parties, the anti-EU sentiments have over the years gradually grown stronger. Bjarni Benediksson was on the pro-EU line around ten years ago but not any longer. The lack of EU option on the right was indeed the single most important reason why Revival was founded as mentioned above.

Jóhannesson is a former fairly influential member of the Independence Party – and a close relative of Benediktsson in a country where blood is always much thicker than water and family-relations matter. One of the party’s MPs, Þorgerður Katrín Gunnarsdóttir, was a minister for the Independence Party in 2003 to 2009 but left politics after the banking collapse, tainted by her husband’s high position with Kaupthing, at the time the largest bank in Iceland.

The question most often put to Revival candidates during the election campaign was if the party wasn’t just the Independence Party under another name. Going into government simply to help the Independence Party stay in power would be unwise as Revival would risk to be seen as exactly that what it’s claimed to be: the Independence Party under another name.

Fishing quota – and EU: a lukewarm topic but possibly a political dividing line

Revival will have to take up the EU matter, i.e. in a coalition with the Independence Party it would have to get that party to fulfil its 2013 promise to hold a referendum on the EU negotiations started under the Left government in summer of 2009. At the time EU membership was driven by the social democrats in spite of the Left Green anti-EU stance: the social democrats had for years campaigned for EU membership, also in the 2009 spring election, and once in government felt they had the mandate to open membership negotiations. The plan was to put a finalised membership agreement to a referendum on membership. Ever since the negotiations started anti-EU forces have claimed it was without a mandate.

The attempts of the Progressive-Independence coalition after it came to power in 2013 to end the negotiation turned into a farce: the two parties didn’t want to bring it up in Alþingi where it risked being voted down and the EU didn’t want to accept a termination unless supported by a parliamentary vote.

Forcing a referendum on the membership negotiation would fulfil Revival’s EU promises and it could most likely count on the support of Bright Future. For the Independence Party it would be a very bitter pill to swallow. Opinion polls have always shown a majority for negotiating though there rarely has been a majority for joining the EU. Event though EU membership isn’t an issue in Icelandic politics it could well draw certain insuperable lines in the coalition talks.

If Revival’s Jóhannesson should be given the mandate to form a government as Bright Future’s Proppé has suggested it would certainly strengthen Jóhannesson’s agenda.

Apart from EU policy Revival has fought for a new agriculture policy, away from the old Progressive emphasis on state aid and most of all for a new way to allocate fishing quota, a hugely contentious issue in Icelandic policies. The two old former coalition partners are dead against any changes whereas all the other parties have presented more or less radical policies to change the present fishery system.

Left government in a conservative country

Ever since the 2013 elections, which ended the left government in power since 2009, the opposition parties have aired the idea of joining political forces against the Progressive-Independence coalition.

Few days before the elections the Pirate leader Birgitta Jónsdóttir called the opposition to a meeting to prepare some sort of a pre-elections alliance or as she stated to clarify the options for a coalition. Revival didn’t accept the invitation and Bright Future wasn’t keen. The Independence Party claimed this was a first step towards a left government and by stoking left fears this Pirate initiative might indeed have driven voters to the conservatives.

Jónsdóttir is now peddling a more simple solution: a minority government of Revival, Bright Future and Left Greens that the Pirates, together with the remains of the Social Democrats, would support. Five parties in a government sounds chaotic – coalitions of three parties have never sat a full term in Iceland. And given the alleged tension in the Pirate Party the other parties might be wary of fastening their colours to the Pirate mast, inside or outside a government.

Minority governments have been rare in Iceland contrary to the other Nordic countries and suggesting this solution as politicians are only starting to explore coalition options will hardly tempt anyone until possibilities of a majority government have been exhausted.

Supporting a government but not being in it would be a plum position for the Pirates. The party has pledged to finish the new constitution, in making since 2008. A new constitution needs to be ratified by a new parliament and the Pirates had called for the coming parliament to sit only for s short period, pass a new constitution and then call elections again. No other party is keen on this and there has been only a limp political drive to finalise a radical rewrite of the constitution.

There are those who dream of a government spanning the Independence Party and the Left Green; this government would however need the third party to have majority. For anti-EU forces this is the ideal government since it would most likely prevent any EU move. But as stated: Left Green Jakobsdóttir has so far claimed the distance between the parties is too great, leaving no basis for such a coalition.

Discontent in a boom without xenophobia and racism

In a certain sense all the new parties are protest parties but not with the sheen of demagogy seen in many other recent European protest parties. The response to the banking crisis and the ensuing massive fall in living standards was certainly a protest against the four old parties giving rise to various new parties of which Bright Future and the Pirates are the only ones now in Alþingi.

The only real touch of demagogy with a tone of xenophobia didn’t come from any of these parties but from the Progressive Party under the leadership of Gunnlaugsson in the 2013 elections and the 2014 local council elections. However, there has so far never been any real appetite in Iceland for this agenda. The Icelandic Popular Front, lingering on the fringe of Icelandic politics for years and the only party offering a pure xenophobic racist agenda, this time got the grand sum of 303 votes or 0.16%.

Compared to the political environment in Europe the real political sensation in Iceland, so far, is that there is no sign of the xenophobia and outright racism in the main parties. Yes, people lost jobs following the 2008 collapse but there wasn’t the sense that foreigners were taking jobs or that foreigners were to blame. As so clear from the debate on foreigners, inter alia in Britain, sentiments normally override facts and figures. These sentiments can be heard rumbling in Iceland but have so far not flourished.

Although the economy has been growing since 2011 following the sharp downturn the previous years and is now booming the discontent is still palpable. Very much directed towards politicians based on a sense of cronyism and the sense that politicians, especially from the old parties, are there to guard and aid special interests such as the fishing industry and wealthy individuals with political ties.

Gunnlaugsson with his Panama connections was ousted. But both Bjarni Benediktsson and Ólöf Nordal his deputy chairman, named in the Panama Papers, have brushed it off easily. Nordal was linked to Panama through her husband, working for Alcoa, but claimed the company was just an old story. Benediktsson owned an offshore company related to failed investments in Dubai and also claimed it was an old story, causing remarkably little curiosity and coverage in Iceland.

The left government, in power 2009 to 2013, did in many ways tackle the ever-present cronyism in Iceland by using stringent criteria and gender balance for hiring people on boards, leading jobs in the public sector etc. Yet, it earned little gratitude for this. One of the most noticeable changes when the Progressive-Independence coalition came to power in 2013 was its reverting back to the bad habits of former times. Over the last few years sales of certain state assets have also raised some questions. Sales of the two now state-owned banks and other state assets on the agenda these will again test the Icelandic hang to cronyism and corruption.

The underlying discontent in booming Iceland possibly shows that it’s not only the economy that matters. But it also shows that after a severe shock it takes time for the political powers to gain trust. The coming four years will be a further test. As one voter said: “I would have liked to see all parties acknowledge the events in 2008 and come forth with a plan as to how to how to avoid the kind of political behaviour that led to the 2008 demise – but there was no such comprehensive plan.”

– – –

The new Alþingi: The new gathering of MPs has a greater number of women than ever before: 30 MPs of 63 are women. The tree youngest MPs are born in 1990, the oldest, and newly elected, is born in 1948. Katrín Jakobsdóttir, born in 1976, is one of seven MPs voted into Alþingi before 2008. Following the three last elections a large number of MPs have left and new ones coming in. As prime minister Sigurður Ingi Jóhannsson said it’s good to get new energy into the austere halls of Alþingi but it’s equally worrying to lose competence, knowledge and experience: 22 have never sat in Parliament before, ten are new but with some parliamentary experience, in total 32 out of 63 MPs.

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For the second day, the Iceland Watch, watching over the interest of the four largest offshore króna holders, has published an ad in Iceland warning Icelanders of corruption and claiming that an official at the Central Bank of Iceland is under investigation at the CBI for insider trading. The whole page ad is under a big portrait of the governor of the CBI Már Guðmundsson, see my yesterday blog.

This morning, the governor met with prime minister Sigurður Ingi Jóhannsson, Lilja Alfreðsdóttir minister of foreign affair and minister of finance Bjarni Benediktsson. After the meeting Guðmundsson said that no Icelandic action is being planned. He said the CBI was certain the measures taken regarding the offshore króna in order to protect the Icelandic economy were sound. “Of course there might be a reason to worry that people get the idea to put out statements like these but there is no reason to worry that any of the statements (in the ad) is based on fact because it  isn’t,” Guðmundsson said to Rúv.

Negative response from the EFTA Surveillance Authority

The four funds holding offshore króna and contesting the measures taken earlier this year are Eaton Vance, Autonomy Capital, Loomis Sayles and Discovery Capital Management. This summer, two of the funds, Eaton Vance, brought the Icelandic offshore króna measures to the attention of the EFTA Surveillance Authority, ESA. Already in August ESA answered the complaint pointing out that it had already dealt with a number of complaints regarding the Icelandic capital controls.

The ESA conclusion was:

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The libertarian Iceland Watch has posted quite a remarkable ad in Icelandic media insinuating serious corruption by a named individual at the Central Bank of Iceland with a large photo of the governor of the Central Bank Már Guðmundsson. If the four largest offshore króna holders, on whose behalf Iceland Watch seems to be campaigning, think they are winning friends in Iceland with these serious and unfounded insinuations, they should think again: the few who seem to notice it ridicule it or find it hugely upsetting.

Iceland Watch, earlier fighting Obama care and now fighting for the cause of the offshore króna holders that feel they have been wronged by the Icelandic government and the Central Bank of Iceland, CBI, has topped its earlier ads. It is now directly addressing Icelandic voters, claiming they are losing out due to the bad policies and corruption at the CBI. Whereas earlier ad was placed in media in Iceland, Denmark and the US, the latest one has, as far as I can see, only been posted in Iceland.

The four funds holding offshore króna are Eaton Vance, Autonomy Capital,  Loomis Sayles and Discovery Capital Management.

So what is the Iceland Watch message, accompanied by a photo of CBI governor Már Guðmundsson, to Icelandic voters?

“Who is paying for public corruption and discriminating rules in Iceland? You do!

The decision taken by the Central Bank of Iceland to discriminate between investors so that only those of domestic origin can invest there has been criticised internationally.

According to a new study done by a research team in Britain the discriminatory policy of the Icelandic capital control hinders the creation of  30.000 new jobs and costs the nation between 5.000.000.000 and 9.000.000.000 US dollars in GDP annually.

This costs each Icelandic citizen between 15.000 and 27.000 US dollars annually.

We have now discovered that Sturla Pálsson, a highly placed individual at the Central Bank of Iceland, is being investigated in-house for alleged insider information.

The investigation of Sturla Pálsson should focus on answering some key questions: Did Sturla Pálsson use his knowledge of the recently announced legislation on capital control that discriminate foreign investors in carrying out insider trading?

Sturla Pálsson answers directly to governor Már Guðmundsson and is believed to have had access to all this information.

Media in Iceland should be asking these questions.

Capital controls and booming economy

Corruption is not an unknown theme in Icelandic politics but it will come as a surprise to most Icelanders that Icelandic officials are acting in a corrupt way to punish the four foreign funds holding offshore króna. We should keep in mind that the International Monetary Fund has followed and scrutinised policies in Iceland since October 2008.

The policy that’s such a thorn in the side of the four funds that they are willing to go to these lengths in advertising their pain internationally has also been passed with full acceptance of the IMF. Yes, the IMF isn’t infallible and perhaps the EFTA Surveillance Agency will indeed find Iceland at fault. But to think that the measures in summer came about because of corruption in Iceland seems pretty far-fetched. Shouting it from the roof tops won’t add to the arguments the funds have presented with the ESA and possibly in courts.

Saying that only domestic investors can invest in Iceland isn’t correct. This does no doubt refer to measures re offshore króna holders but it’s not a correct presentation.

Why doesn’t the Iceland Watch quote the UK research? As far as I know it comes from the Legatum Institute, connected to the Dubai-based Legatum Group established in 2006 by Christopher Chandler. The Legatum Institute recently had a discussion on Iceland and capital controls and has also published research of capital controls and anti-competitive policies. What is wholly missing is how the easing of capital controls has been done; it only focuses on the perceived harm caused by the most recent measures that has so upset the four funds.

Eh, creating 30.000 jobs in an economy with close to full employment in a country of 332.000 that needs to import people to fill jobs? And let’s put the figures in context: $5bn to $9bn amounts to 25-40% of Icelandic GDP. Is it credible that these latest measures hurting the four funds are really costing the Icelandic economy these sums annually? Intelligent readers can figure out the answers on their own.

If Iceland Watch intended to clarify to Icelanders the enormous losses they are suffering it would have helped to publish these losses in Icelandic króna, not in US dollars.

Serious allegation against a CBI official

It will be news to Icelanders that the CBI is investigating Sturla Pálsson for using his knowledge of the recent measures for his own gain via insider trading. Again, this is a statement with no verification. Given that the Icelandic media mostly ignores the ad and the reaction in Iceland is not to take this seriously at all it’s not certain that the CBI will see any reason to answer.

Pálsson has however recently been named in the Icelandic media related to breach of trust over the weekend October 4 to 5 2008: he told his wife, who was at the time the legal council at the Icelandic Banking Association (and is in addition closely related to Bjarni Benediktsson leader of the Independence Party and minister of finance) of the imminent Emergency Act. – The Iceland Watch allegation could possibly be a misunderstood echo of this recent reporting in the Icelandic media or indeed a new and much more serious allegation, unknown in Iceland.

Regardless of the basis for the allegation against Pálsson the question as it is put is ambivalent: Did Sturla Pálsson use his knowledge of the recently announced legislation on capital control that discriminate foreign investors in carrying out insider trading? – I guess this is insinuating Pálsson used his information to carry out insider trading but the sentence is so muddled that this isn’t clear at all. (The Iceland Watch text is: “Did Palsson use his position of knowledge about the recently announced capital controls legislation which discriminates against foreign investors to make insider trades?”)

Losing friends and influence… in Iceland

I’ve earlier expressed surprise that the funds think they are gaining friends and influence in Iceland through their alliance with Iceland Watch. This latest ad, apparently only directed at Icelanders, indicates a profound lack of understanding of the country they are trying to influence (tough I can’t imagine this approach will indeed work anywhere).

The photo of the ad above is my screenshot of a post on Facebook by minister of foreign affairs Lilja D. Alfreðsdóttir. Her comment to the ad is: “This attack on Icelandic interests is intolerable and what’s the aim of those behind it?” There are only few comments to the ad but some mention that this will hardly help the cause of those sponsoring it.

The ad is now also on the Iceland Watch website in English. The translation above is my translation as it gives some sense of what it looks like in Icelandic. The story is that this remarkable ad addressed to Icelandic voters is written in a version of Icelandic that resembles a Google translate text. Given that Icelanders are often quite pedantic about their language this will hardly induce Icelanders to take the ad seriously. Or as it says in one comment on Alfreðsdóttir’s Facebook page the ad is “a crime against the Icelandic language” – and that’s a serious offence in Iceland.

Updated: I’ve been made aware that Loomis Sayles is not at all involved in the Iceland Watch campaign against Iceland. I’m sorry that my earlier information here was not correct.

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The offshore króna holders have now taken to the international media to cry out over the unfair treatment they have been submitted to by the Icelandic government. As earlier, they have allied with a strongly libertarian  organisation, Institute for Liberty, a think-tank of sort. Perhaps the ads will shake international investors but the effect in Iceland seems to be next to none and the move is clearly not intended to win them friends in Iceland. Perhaps it’s too early to tell but so far, the International Monetary Fund does not seem to side with offshore króna holders and rating agencies seem forgiving. All of this is taking place as Iceland has taken yet another step to lift capital controls, which are now almost entirely lifted for both businesses and individuals. 

After placing articles in various international media recently, “Iceland Watch,” an initiative organised by a so-called think tank, Institute for Liberty with the slogan “Defending America’s Right To Be Free” has now taken a new step: placing an ad in US, Danish and Icelandic media. As mentioned earlier, DCI Group, a political PR group based in Washington acts on behalf of the funds involved.*

If Iceland will be hit with a full-force international legislation the offshore króna holders may be the last to laugh but so far Icelanders are just shrugging their shoulders at the ad campaign they don’t really understand.

A clever campaign?

It’s not clear to me who this campaign is supposed to stir and shake. Here in Iceland, very few people have any particular understanding of the issues at stake. After the very unexpected outcome of the EFTA Court Icesave ruling in January 2013 most Icelanders will feel there is little  to fear from international courts.

Of course an erratic opinion, the offshore króna case is a different problem but in addition to lacking the insight the words “international litigation” will not sound frightening in Iceland. Given how few Icelanders understand the issues at stake the ads look bizarre to most Icelanders.

There is now an election campaign going on in Iceland, election on October 29 and the offshore króna situation doesn’t figure at all. Nor are the capital controls an issue since they have now been lifted on domestic entities and individuals. I’ve earlier pointed out that Icelanders didn’t really seem to notice when measures to lift capital controls were announced.

I’m not sure the campaign rocks the boat among international investors. Anyone with a nuanced understanding of the Icelandic situation will sense that the Iceland Watch claims are not really fitting the situation in Iceland but bombastic, unintelligent and wide off the mark.

Select default? Doesn’t sound like it according to  IMF or rating agencies

I have earlier expressed surprise at the action taken in Iceland. Iceland is clearly exposing itself to a legal risk – there is a question of discrimination, as the offshore króna holders claim and given the good times in Iceland it’s difficult to argue for the haircut.

That said, it’s interesting to observe that neither the IMF nor rating agencies, have so far admitted to the haircut potentially being a case of selected default. The offshore króna holders might have wanted the international community to kick Iceland in place but no one is moving for them except those the króna holders muster to speak their case.

Choosing Institute for Liberty as an ally is intriguing but perhaps not surprising given that many  large players in the hedge fund world have libertarian leanings.

The offshore króna saga according to the CBI

In its latest Financial Stability report the CBI spells out the offshore króna problem:

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For a long time Iceland didn’t know anything but A from the credit rating agencies. As so many other things the As evaporated with the banking collapse in October 2008. Lately, everything has been going swimmingly for the Icelandic economy except the A rating has proven to be elusive. Now, Moody’s has fixed that: Iceland is back to A3, outlook stable. Icelandic politicians and central bankers will nod approvingly, they feel the A should have been there a while ago; the only group, which might feel perplexed are the offshore króna holders who think they are being short-shrifted in spite of the boom.

Icelandic politicians and central bankers feel that Iceland has been doing much better than reflected in the rating agencies’ ratings. This is partly acknowledged by Moody’s (emphasis mine):

Iceland’s rating trajectory has lagged the improvement in some of its core fundamentals since the financial crisis, because of the residual risks posed to economic and financial stability by the complex process of removing the capital controls first imposed in 2008. The second driver for the upgrade of Iceland’s government rating to A3 at this point in time reflects Moody’s expectation that the phasing out of capital controls will proceed smoothly to completion and therefore not disrupt economic and financial stability.

Moody’s argues that Iceland now is far into liberalising the capital controls – the third step, lifting controls on Icelanders and Icelandic entities, is now in sight, having been announced recently. As I pointed out recently, the lifting now longer seems to capture Icelanders, the announcement went largely unnoticed.

As to offshore króna holders Moody’s isn’t worried either:

The first two stages of the liberalization process are now complete. The resolution of the failed bank estates was completed in late 2015. In June 2016, the central bank auctioned part of its FX reserves for ‘offshore krónur’ (mainly non-resident-owned ISK assets trapped when capital controls were imposed in late 2008 at the time the old banks collapsed), thereby further reducing the overhang of such assets. Moody’s view is that while the few remaining holdings of offshore krónur are sizeable at 8% of GDP, the event risk they pose for Iceland’s external position is limited. The liberalization of capital controls on residents will begin immediately following parliamentary approval of the relevant legislation. A further easing of controls on residents is scheduled to take place on January 1, 2017.

If the offshore króna holders thought the rating agencies would favour their points of view, inter alia interpreting the offshore króna measures as a selective default as has been heard from the offshore króna holders, or would be likely to calculate litigation as a risk, that doesn’t seem to be the case. In Iceland, things are going swimmingly, the economy is booming and at long last Moody’s as the first of the rating agencies has acknowledged it. So far, so good.

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